Austerity and Brexit in England

Ever since the UK voted to leave the EU, there has been a steady stream of articles and analysis trying to figure out why. Clearly there is more than one answer: different people voted for Brexit for different reasons. Nonetheless there are some patterns. By analysing the vote share by local authority, the Resolution Foundation found that areas with higher employment rates, larger student populations, more people with degrees and higher social cohesion were more likely to vote remain. Areas with more old people, more homeowners and those that have only recently seen an increase in immigration were more likely to vote leave.

But one possibility has proved controversial: was austerity partly responsible? Chris Dillow thinks it’s possible. Austerity contributed to stagnant incomes, which may have increased resentment towards “elites”, and to a decline in public services which the leave campaign blamed on immigration. Chris’ thesis received a bit of stick on Twitter from Giles Wilkes and Rupert Harrison.

In one sense, they have a point. The Resolution Foundation’s analysis looked at how average incomes in different areas were related to the share of votes for leave. While the level of income was important, recent changes were not, suggesting that the income effect isn’t related to austerity. But in another way Chris might be right. Stagnating incomes may be an indirect effect of austerity, but a rather more direct effect (which is not included in the Resolution Foundation’s analysis) is the deterioration in public services.

Austerity has led to cuts in many public services, but local councils – who take out the bins, run the libraries and provide social care – have been hit particularly hard. Local government spending power[i] in England fell by nearly 15% in real terms between 2011/12 and 2015/16, but the impact wasn’t felt equally in all parts of the country. Areas that collect a lot of council tax relative to their total spending got off lightly – Surrey’s spending power fell by less than 5% in real terms – while those that rely heavily on central government grants have been hammered – Liverpool City Council’s spending power fell by nearly 23%.

Big drops in spending power mean closing libraries, fewer bin collections and cuts to social care. It seems plausible that in areas where public services have deteriorated further, the argument that immigrants are overwhelming these services – as championed by the Faragist wing of the leave campaign – may have more traction.

The chart below shows how changes in spending power in local authorities in England[ii] between 2011/12 and 2015/16 are related to the share of votes cast for leave.

Change in local government spending power (horizontal axis) versus share of votes case for leave, upper-tier local authorities in England

You might look at this and think there is no clear correlation – but the distribution is far from random. It looks to me like there are two things going on: a negative correlation for most areas, plus a cluster at the bottom left that seems to behave differently. There are no prizes for guessing where most of these outliers are located: they are London boroughs.

The next chart shows the same data with inner (blue) and outer (red) London boroughs highlighted. London voted differently to the rest of the country. Inner London (and some “outer London” boroughs such as Newham) saw big cuts in local government spending, but voted overwhelmingly for remain.

Change in local government spending power (horizontal axis) versus share of votes case for leave, upper-tier local authorities in England
Blue dots are inner London boroughs, red dots outer London

Not all London boroughs followed this pattern. Havering had a relatively small drop in local government spending, but voted heavily for leave. This shows the limitations of using “London boroughs” as a sociological grouping. Havering is the most easterly London borough and surrounded on three sides by Essex. It is just a half hour’s drive from Newham, but a very different place.

Just as not all of London followed a “London-like” voting pattern, not all other areas followed an “unLondon” voting pattern. If we exclude London from the chart, there are still a few stray dots hanging around in that bottom left area – areas that, like many parts of London, voted remain despite large council cuts. Again, there are no prizes for guessing where these places are: successful cities like Liverpool, Manchester, Bristol and Brighton.

Change in local government spending power (horizontal axis) versus share of votes case for leave, upper-tier local authorities in England excluding London

So it seems that we can divide England up into two groups: “London-like” areas, which include most London boroughs and some other successful cities; and “unLondon”, which is everyone else. Many London-like areas have seen big cuts to local services and still voted remain. But when we look only at unLondon[iii], we see a different pattern: areas with bigger cuts to local services cast a greater proportion of votes for leave.

On the basis of this, it seems quite plausible[iv] that austerity was one of the drivers of the Brexit vote – but this effect was mediated by cuts to local services, rather than stagnating incomes.

Change in local government spending power (horizontal axis) versus share of votes case for leave, upper-tier local authorities in unLondon

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[i] Calculating trends in council funding is tricky, because responsibilities of councils change year-to-year. When responsibilities are added, extra money might be attached to them but this doesn’t ease the pressure on other services. Luckily, the Department for Communities and Local Government publishes “spending power” estimates which (for any two adjacent years) try to take account of these changes. By cumulating the year-on-year changes, and adjusting for inflation, we can get a reasonable estimate of the changes over time in funding for local services.

[ii] The data are for upper-tier authorities. For two-tier areas (the shire counties) the spending power of the districts within each county has been included to make the figures comparable with unitary authorities.

[iii] For the purposes of this analysis, only Liverpool, Manchester, Brighton and Bristol have been excluded from unLondon, since they are the most obvious outliers.

[iv] There are two important caveats here. First, to believe in this correlation, you have to believe that the London/unLondon split makes sense and isn’t just a convenient choice to generate a spurious correlation. For me, the story works, but you will make up your own mind. Second, this analysis only looks at one variable, so it’s possible that the pattern is actually driven by something else, such as difference in average incomes. The Resolution Foundation’s work deals with this problem by including a wide range of variables – but nothing on cuts to local services. I’d like to see them add this to their analysis.

Three golden rules for discussing progressivity

What does it mean for a policy to be progressive? The way this question is addressed by the media (and often by government) can be infuriating. It’s got to the point where I am tempted to say the term should be banned, but instead I am going to make one last attempt to clarify it by proposing three golden rules.

I was reminded of this issue when reading Jo Maugham’s analysis* of the impact of the new “social care precept”. This is essentially a £2bn rise in council tax, a significant proportion of which will be paid by poorer households. Here are the figures that Jo gives:

So is this tax progressive or not? Well, rich people pay more, and for some that’s good enough. Fraser Nelson, for example, likes to point out that “the top 3,000 taxpayers in Britain stump up more income tax than the lowest-paid 9 million”. It is more common to look at how paying tax affects the living standards of different groups by comparing tax paid as a proportion of income. By this measure, council tax is regressive.

This is as far as the discussion usually goes. But both of these comparisons have no basis in reality – unless that reality involves collecting these taxes and throwing the money in the sea. The fact is that this money will show up somewhere else, either as increased spending or lower taxes. Which brings me to my first golden rule: the distributional effect of a policy change can’t be assessed without looking at both sides of the equation.

Since this is called the “social care precept”, we might think that it will lead to increased spending on social care. It’s not easy to find numbers on how social care spending is split between income groups, but modelling done in 2011 for the Dilnot Commission (see figure 11 here) made some estimates. Reading the numbers off the chart, I get something like this.

Social care spending is more heavily weighted towards poor people than council tax collection, so lower income groups make a net gain from this policy. That is, the introduction of this policy increases the total amount of redistribution that the government does, which is the only sensible definition I can think of for the word “progressive”, with reference to a change in policy.

But is higher spending on social care really the effect of this policy? That is, if it weren’t for the social care precept, would we see lower social care spending? You could argue that social care spending is going to rise either way, since we’ve got more old people than ever. If it’s not paid for by council tax rises it will be paid for by higher taxes elsewhere, higher borrowing, or cuts to other services.

So this is my second golden rule: identify a realistic counterfactual. We need to know whether the policy leads to more redistribution than what would otherwise have happened. That “what” can have a huge impact on how we view the distributional consequences.

Let’s say we believe that without the social care precept higher social care spending would have to be funded through an increase in income tax – or perhaps higher borrowing now, funded by future increases in council tax. As Jo points out, income tax is much more targeted on rich people than council tax. Here’s the net effect of raising £2bn through council tax instead of income tax.

This policy change would give money to the richest 20% at the expense of everyone else. I think we can all agree that’s regressive. So depending on the counterfactual, the social care precept is either highly progressive or highly regressive. Take your pick. We need to decide which counterfactual is more realistic. In this case, the first one is probably closer to the truth (raising income tax and borrowing more are not top of this government’s agenda) so I’d argue that the policy is probably progressive.

But there’s another more fundamental question here: how much redistribution do we want? Requiring all policy changes to be “progressive” implies that we think we don’t currently have enough. But at some point, if we were to go on increasing redistribution, we’d have too much. Views will differ wildly as to what the optimal level is, but in principle there must be one. I imagine few people think that there should be no redistribution and few think that redistribution should fully equalise living standards.

And even if we want more redistribution, we might not care if a policy is regressive if its effect on the overall level of redistribution is small and it achieves some other aims. The state does not exist solely for the purpose of moving money from the rich to the poor. My third golden rule is therefore this: the overall level of government redistribution is what matters. We need to know whether we want to increase or decrease it, and how much we care about small changes relative to other policy aims.

These rules really are essential. It is impossible to say anything about whether a policy change is progressive without considering both sides of the equation and being clear about what you think the alternative scenario is. It is impossible to know whether you actually want the policy to be progressive, or whether you care, without considering the overall level of redistribution.

These are not new insights and many organisations (the IFS, the OBR, sometimes even the Treasury) are quite diligent about doing distributional analysis properly. But much of the public discussion of “progressivity” fails to follow a single one of these rules, giving us a rather poor standard of debate on the state’s role in reducing inequalities.

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* I’m not picking on Jo’s analysis because it is a particularly egregious example. On the contrary, I am picking on it because is one of the better examples of someone tackling this question, so Jo has done most of my work for me.

The other referendum and the future of local democracy

So farewell then, Eric Pickles, one of the surprise casualties of the post-election cabinet reshuffle. His time in charge of the Department for Communities and Local Government (DCLG) was characterised by a combative approach towards local authorities, and nowhere is this more evident than in the squeeze that he put on their finances. So there was a certain irony in the fact that only a day before he was relieved of his duties he scored a significant victory in his battle with councils when the people of Bedfordshire voted against increasing council tax to pay for extra police officers.

To understand the significance of this, we need to back up a little and get our heads around how local government finance works in England. It’s a horrendously complicated system, so we’ll save the full story for another time, but here’s the short version.

Councils get some of their funding from council tax. They set the level of this tax, collect it from residents and spend it locally. This accounts for about 40% of their funding. Councils also collect business rates from commercial properties in their area, but they don’t set the level of this tax and they don’t get to keep the money, which goes instead to the Treasury [i]. The rest of their funding comes from central government in an ever-shifting range of grants, mostly paid by DCLG.

Over the last parliament, these grants were cut back severely. The IFS estimates that between 2009-10 and 2014-15, central government grants to local authorities were reduced by 36.3%. That means that the 60% of council funding that comes from central government fell by more than a third [ii]. In times past, councils could have raised council tax to offset these cuts. Of course, there were limits to this, since they would have to answer to their voters at the next local elections. That’s how local democracy works. Or rather, that’s how it used to work.

You see, Eric Pickles was determined that councils wouldn’t be able to raise council tax to compensate for his department’s cuts. Right or wrongly [iii], he viewed councils as wasteful, overly bureaucratic and in need of a bit of fiscal discipline. To make sure that this discipline was not undermined by council tax rises, he decided to neuter councils’ revenue-raising powers with a combination of carrot and stick.

The carrot was the council tax freeze grant. Councils that agreed to freeze council tax in nominal terms (i.e. a real terms cut) would receive a grant from DCLG to compensate them for some of the cost of doing this [iv]. The stick came in the form of council tax referendums. Any council that wanted to raise council tax by 2% or more (in nominal terms, so usually that would only just keep pace with inflation) is now legally required to hold a referendum. Pickles was presumably calculating that such a referendum – where a council asks its population whether they want taxes to rise – would be difficult to win. Voters understandably favour lower taxes and better public services, which is why politicians often pretend that they can deliver that heady combination by “eliminating waste”, “reducing bureaucracy” or even “cracking down on tax avoidance”. Few politicians dare to go to the polls on a platform of raising taxes, even if they know they will have to do so once they are in office.

Councils seem to agree with this calculation, since despite huge cuts to their budgets and pressures to deliver better social care and collect bins more often, not one council has triggered a referendum by trying to raise council tax by 2% or more [v] – until now.

All of which brings us, finally, back to this week’s referendum result from Bedfordshire. The referendum was triggered because Bedfordshire’s Police and Crime Commissioner Olly Martins wanted to raise £4.5 million to put an extra 100 police officers on the streets. This would have meant increasing the police’s council tax precept (not council tax as a whole, just the police bit of it) by 15.85%. When asked whether they wanted council tax to rise, the people of Bedfordshire said no. Naturally, they preferred for the extra police officers to be funded by eliminating waste, reducing bureaucracy and cracking down on (council) tax avoidance.

There may be other reasons why this rise was voted down. Kelvin Hopkins, MP for Luton North, blamed it on the wording of the ballot paper, which is set by DCLG. The ballot paper asked people about a 15.85% rise, but Mr. Hopkins thinks that “if it had said ‘would you be prepared to pay 18p a week extra for 100 extra police officers’ people might have said yes”. Whether or not that’s true, any other council that braves a referendum will face the same wording restrictions and the result in Bedfordshire will make them even less confident of victory. In effect, councils can no longer make decisions on levels of taxation and expenditure, reducing them to managers administering the budgets allocated to them by Whitehall.

This curtailing of council power seems perverse when viewed alongside this week’s third notable piece of local government news. In a speech on Thursday, the Chancellor outlined plans for greater devolution to cities that are willing to elect a mayor, starting with Manchester. This “radical devolution” will give local government the “levers to grow their economy”, including transport, planning, housing, policing and public health, but no new revenue-raising powers.

So even under these plans, while councils will be given additional managerial responsibilities, they will remain at the mercy of central government for their funding. As Mr. Pickles’ time in office demonstrates, central government can and will use this as a stick to beat them with. Devolution should be about a transfer of power (actual power that is, not just “powers”) from central government to the local level, but Whitehall is offering to give up precious little power here. Local government will remain relatively unimportant, and since voters recognise this, local democracy will remain weak and participation levels low.

The experience of other countries shows that it doesn’t have to be like this. US states have significant revenue-raising powers, although since the country is much larger than ours this may not be a fair comparison. European examples may be more relevant. In Germany, the sixteen Länder have significant powers; and Swedish municipalities – the lowest level of government – set and collect taxes on income.

Council tax is a poorly-designed and regressive tax that badly needs reforming (for example, it could be replaced with a progressive levy on property values). But control of a reformed council tax should be handed back to councils, without forcing them to undergo unwinnable referendums just to keep pace with inflation. Local governments should be elected for a period then allowed to do their jobs until they face the voters again at the next election – just like central government is. Along with devolution measures of the sort proposed by the Chancellor, this would help to create stronger local democracy that people actually care about and which makes a real difference to their lives.

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Notes

[i]
DCLG recently introduced a “business rates retention” scheme, which allows councils that increase their business rates take (by having more businesses in their area) to keep a bit of the money. But since the Treasury still controls the overall level of non-council tax money going to councils, this amounts to a zero sum game between different authorities. If you grow your business rates, but everyone else grows them by more, you actually lose money. Perhaps more on this another time, but for now it’s enough to note that this hardly counts as a revenue raising power.

[ii]
In fact, this proportion varies across the country. Councils that have a small council tax base (relative to their assessed funding need) get more than 60% of their revenue in central government grants. These councils (which tend to be in more deprived areas) feel the effects of grant reductions much more sharply. The IFS estimates that between 2009-10 and 2014-15, council spending per person fell by an average of 23.4% in real terms; but spending in Westminster fell by 46.3%, while spending in North East Lincolnshire fell by just 6.2%. This system is frankly nuts and in dire need of reform. Perhaps more on this another time.

[iii]
As always with local government issues, the answer is probably that some councils are wasteful and others are efficient. It is worth noting however, that central government has no way of identifying the wasteful councils, let alone targeting spending cuts on them.

[iv]
It seems to me that councils would be mad to take up this offer, since the grant is not recurring but the losses from freezing council tax are (unless they are willing to brave a council tax referendum to play catch-up). But in fact, a majority of councils took this offer up, at least in the early years.

[v]
A number of councils raised council tax by 1.99%, the maximum that would not trigger a referendum and just about keeping pace with inflation. Pickles branded these councils “democracy dodgers”. This tells us a couple of things about Pickles’ view of democracy. First, he is implying that traditional local democracy, where councils are elected and are accountable for their actions (and which mirrors national democracy), is not real democracy. Second, he is saying that voters should be consulted when council tax is raised, but not when it is cut. In fact, he is saying that voters should be consulted if council tax is raised in line with inflation – i.e. if it stays the same in real terms – but not if it is cut.